Precise drafting of loan documents is essential when documenting a loan. Clear and unambiguous loan documents accurately reflect the agreement of the parties and protect both lenders and borrowers. When issues arise relative to the terms of the underlying loan documents, failure to clearly articulate the obligations and agreements of the parties may preclude recovery. In the recent case of AgStar Financial Services v. HJR Farms, LLC, et al., the Minnesota Court of Appeals held that a personal guaranty was unenforceable because it failed to contain a material term, specifically, the percentage of obligations which the guarantors guarantied.
By way of background, the Agstar case involved a promissory note entered into in January of 2007 by and between AgStar and HJR Farms in the principal amount of $3,257,000.00. The members of HJR Farms and their spouses signed personal guaranties. After the loan went in to default, Agstar commenced a lawsuit against HJR Farms and all of the guarantors. Judgment was granted against HJR Farms, but not the guarantors.
The Court of Appeals looked to the language of the guaranty agreements to determine the intentions of the parties and determine liability. The guaranty agreements provided:
Guarantor unconditionally and absolutely guaranties the due and punctual payment, performance and observance by Borrower of any and all of the Obligations, whether or not according to the present terms thereof, at any earlier or accelerated date or dates as provided therein, or pursuant to any extension or extensions of time or to any change or changes in the terms, covenants and conditions thereof, now or at any time hereafter made or granted. The liability of Guarantor to Lender under this Agreement is unlimited in amount, unless one of the following boxes is checked:
___ The liability of Guarantor is limited to not more than $___________.
X The liability of Guarantor is limited to _____ % of all present and future obligations of Borrower to Lender.
AgStar argued that checking the box and leaving the space blank meant that the guarantors were to be 100% liable. The Court disagreed and reasoned that “the checked box next to this language suggests that the parties assumed their liability would be limited to less than 100%.”
The guarantors argued, and the Court of Appeals agreed, that the inclusion of the percentage of liability was a material term and the absence of a number in the space indicated a lack of mutual assent between the parties, rendering the guaranties unenforceable.
The moral of the story is to consider the implications of each term contained in the underlying loan documents. In the event that a loan does find itself in a workout or litigation, carefully drafted loan documents can expedite relief and save in the time and costs associated with prolonged litigation. In this case, by not completing the percentage, whether intentional or not, the bank nullified the guaranties.